What should we know from Yellen and Powell?

Stocks saw rare volatility yesterday. On one hand, the Federal Reserve raised interest rates by 25 basis points as expected at its FOMC meeting and expanded deposit protection measures to cope with banking crisis. On the other hand, Treasury Secretary Janet Yellen (former Fed chair) said I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits

Media was sensitive, believe that Powell's words conflicted with Yellen's, and the market interpreted them as negative signals.

Did Powell and Yellen's words clash?

Let's check what they said.

Powell spoke at conference after FOMC meeting.

Federal Reserve, working with the Treasury Department and the FDIC, took decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system. These actions demonstrate that all depositors' savings and the banking system are safe.

The Fed is the central bank and the lender of last resort for all banks. Therefore, it needs to be responsible for the safety and liquidity of bank assets.

Yellen expressed her views at a Senate Appropriations subcommittee hearing.

We worked with the Federal Reserve and FDIC to protect all depositors of the two failed banks. On Monday morning, customers were able to access all of the money in their deposit accounts so they could make payroll and pay the bills. Shareholders and debtholders are not being protected by the government. Importantly, no taxpayer money is being used or put at risk with this action. Deposit protection is provided by the Deposit Insurance Fund, which is funded by fees on banks.

Yellen stood on behalf of the U.S. government to protect depositors' rights because they are fund holders but shareholders and bondholders are not protected because they are investors. The Deposit Insurance Fund is a "fee" paid by banks, so in this case, the government used this fund to cover depositors' losses through a resolution. But when asked if providing insurance for all U.S. deposits required congressional approval, Yellen said she had not considered such a measure but was reviewing bank risks on a case-by-case basis.

Who's Idea of raising deposit insurance?

Reuters' sources who leaked that government officials discussed raising deposit insurance limits without congressional approval.

But at the same time, they also stressed that although they discussed temporary solutions without congressional approval, any permanent action would require congressional approval; they did not think it necessary to take such measures because they had tools to support community banks.

We believe that Yellen and Powell's statements do not conflict

1) Neither of them expressed support for "raising deposit insurance limits". The worst-case scenario is that some problematic small banks pose systemic risks that can be considered on a case-by-case basis for coverage. Raising FDIC deposit insurance limits arbitrarily means that all banks including "Too Big" ones have taxpayers pay for them; not only Congress may not pass it; even if it passes; it will also hit U.S. debt greatly; it may not be risk-free assets.

2) Both of them focused on "strengthening depositors' (public) confidence in the banking system", which is essential to prevent further bank runs. Powell explicitly said "bank deposits are safe"; Yellen's focus was on preventing systemic risks; preventing further runs; and stricter regulation of financial institutions (possibly extending to shadow banks).

3) From the Fed's perspective; what matters more now is providing liquidity; all U.S. banks are worried about bank failures spreading; so there was BTFP and increased liquidity; to prevent further runs. From Treasury's perspective: ensure no runs occur; no systemic risk occurs; ensure asset (including Treasury) security; and review bank risks on a case-by-case basis.

Investment Highlights

The current problem for U.S. banks is liquidity, not asset quality. Liquidity crises tend to be sudden and intense, and not necessarily systemic risks, but if handled poorly, they could indeed turn into systemic risks. we also talk about Fed's increasing balance sheet, but this time it's not QE, but targeted relief through the discount window, which banks have to pay back after the crisis.

What the market worries about is that bank crisis may be just a start. They worry about continued pressure from deposit outflowsand banks continue to suffer from liquidity pressure; leading more failues.

The Fed provides liquidity to banks, which is not only to help them through difficulties but also to some extent to save (including its own) balance sheets. The underlying assets of bank mismatches are mainly long-term bonds and MBSs that the Fed also holds.

Maturity mismatch does not mean that these assets themselves have problems. It's just a liquidity problem for asset holders. But because banks have to sell these assets at a discount to ensure liquidity; causing bond prices themselves to distort; even affecting Treasury yields; then it means that markets are implementing monetary policy on their own; which will greatly reduce the role of central banks. By then systemic crisis caused by this would be hard to end.

So what matters most for both Fed and U.S. government is "whether it constitutes systemic risk"; and it is less important than blanket of deposit insurance than offering liquidity crisis.

Market has priced-in expectation, and now it's selling off, it just time for cooling down.

As for banks, investors should wait, at least until things are clearing up. Individual investors who want to participate in the game need look at their own portfolio, whether the volatility of $First Republic Bank(FRC)$ $First Horizon National Corp(FHN)$ $Western Alliance Bancorporation(WAL)$ even $Charles Schwab Corporation(SCHW)$ could match their own risk preferences.

# Regional Banks Recover From Crisis?

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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Comment35

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  • Zarkness
    ·2023-03-23
    TOP
    Yes its very volatile !!
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    • Zarkness
      Yes
      2023-03-24
      Reply
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    • nicholas84
      gd chance
      2023-03-24
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    • wyin08
      ooo
      2023-03-23
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  • highhand
    ·2023-03-23
    we should know that they are not playing around when it comes to killing inflation.
    they can sacrifice banks, jobs and the economy to do their job.
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  • goldenballs
    ·2023-03-24
    As always flip prata here n there [Duh]
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  • miker9110
    ·2023-03-26
    G
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  • VivianChua
    ·2023-03-26
    ok
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  • boonk
    ·2023-03-26
    swing
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  • miker9110
    ·2023-03-25
    k
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  • Acip Sudirja
    ·2023-03-25
    ok
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  • 1MStream
    ·2023-03-24
    Good
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  • Acip Sudirja
    ·2023-03-24
    ok
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  • ongcjeric
    ·2023-03-24
    Bb
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  • henghm
    ·2023-03-24
    like
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  • Acip Sudirja
    ·2023-03-24
    ok
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  • 虎视Tan
    ·2023-03-24
    👍
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  • Acip Sudirja
    ·2023-03-24
    ok
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  • Cory2
    ·2023-03-24
    Thanks
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  • Bel8680
    ·2023-03-24
    ok
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  • Brando741319
    ·2023-03-24
    Ok
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  • FilMel050321
    ·2023-03-24
    Ok
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  • HENRYCSC
    ·2023-03-23
    Thanks
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